Here’s a preview of political drama that may be running at the Capitol for the next two years.

The central character is Gov. Dannel P. Malloy, who is running out of popular options for solving Connecticut’s fiscal woes.

The rest of the cast comes from Connecticut’s urban centers — which played a key role in electing the Democratic governor – and whose residents were among the hardest hit in the last recession.

The plot revolves around Malloy’s plan to curtail Medicaid benefits for single adults, a cut the governor needs to keep his new budget from slipping into an early deficit.

Meanwhile, Democratic legislators from Connecticut’s cities say this would leave more than 13,000 of the state’s poorest residents — most of whom are their constituents — with no health coverage in a legislative election year. A better alternative, they say, would be to raise taxes on big business or the wealthy, neither of which are prevalent in their districts.

Rather than embarrass Malloy publicly by rejecting his plan, majority Democrats on the Appropriations and Human Services committees abruptly adjourned their joint meeting last week.

If those panels don’t vote to block the plan before Aug. 18, Malloy can pursue this social services cut — and possibly more in 2013. Committee leaders are expected to meet Thursday with administration officials to try to find common ground.

And while that wasn’t the first social services cut the administration has sought since state revenue projections first began to shrink last November, it is arguably the most significant — and most visible — cutback offered to date.

‘Bare bones’

“When it comes to the safety net, I really think we are at bare bones,” Sen. Toni Harp, D-New Haven, co-chairwoman of Appropriations, said Tuesday.

“The governor doesn’t want to cut social services either,” Roy Occhiogrosso, Malloy’s senior policy adviser, said Monday. “But his job is to be the governor of the entire state, not just the cities.”

Occhiogrosso noted that Malloy was mayor of one of Connecticut’s largest cities, Stamford, for 14 years, through 2009. “He understands the problems faced by urban populations,” Occhiogrosso added. “It’s a balancing act.”

Malloy faced the ultimate fiscal balancing act when he took office 19 months ago, inheriting the largest projected deficit in state history. The legislature’s nonpartisan Office of Fiscal Analysis had projected a built-in hole as high as $3.67 billion in the 2011-12 fiscal year — a gap equal to nearly one-fifth of the entire budget.

The governor and legislature took a three-pronged approach to resolve that, ordering $1.5 billion in new state taxes and fees; assuming a significant economic recovery and increasing General Fund revenue projections by $900 million; and covering the remainder with a state employee concession plan and other cuts in spending below the level needed to maintain current services in 2011-12.

And while some aspects of the concession plan haven’t saved as much as Malloy had hoped, Connecticut’s sluggish economic recovery has created the biggest budget challenge.

It’s not that state revenues haven’t grown since 2011. They just haven’t grown as quickly as anticipated.

The latest projections for General Fund revenues both this fiscal year and for the next each are about $370 million less than the administration originally projected.

Part of Malloy’s solution to the current year was to save $50 million in the Medicaid for Low Income Adults program, or LIA, by restricting eligibility until 2014, when federal aid for the program increases significantly.

That was the largest social service cut proposed, but the governor also sought modest cuts this year for school-based health clinics, children’s health initiatives and community-based health services.

13,400 would lose coverage

LIA serves single adults who have no minor children and whose incomes are at or below 55 percent of the federal poverty level. Enrollment has shot up over the past two years from about 47,000 to nearly 78,000.

To control costs, the administration has proposed two eligibility restrictions: setting an asset limit of $10,000; and requiring that if a LIA applicant is between ages 19 and 26 and lives with a parent or can be declared as a dependent for income tax purposes, the parent’s income and assets must be counted.

The state Department of Social Services estimates that with these changes, nearly 13,400 LIA recipients would lose coverage.

Health-care advocates have argued that the proposed restrictions could, in fact, affect 15,000 people, most located in Connecticut’s cities. And more importantly, they say, there is no evidence that most of these recipients have the resources to buy private health insurance.

But if lawmakers block the change, that creates a new problem. That’s because the $20.5 billion budget adopted for this year already assumes the $50 million savings. When lawmakers approved the budget last May, full details on how the LIA savings would be achieved weren’t defined.

“I’m not a numbers person, but when I listen to the testimony of the people who are going to be the recipients — or the non-recipients — of these services, I am not pleased” with the planned reduction, said Sen. Edwin Gomes, a Democrat from Bridgeport, Connecticut’s largest city.

“I know we have problems in this state, but this is sad,” added Rep. Minnie Gonzalez, D-Hartford. “We want to fix our budget on the backs of poor people?”

Gonzalez, who — like Gomes — voted for the budget but now is wary of implementing the LIA cut with the details on the table, said she didn’t realize how much damage it might do until she looked into problems at the social services department this summer.

A health care advocacy group is suing the state, charging that the Department of Social Servicers has failed to process Medicaid assistance applications on time. Requests to renew assistance have been improperly terminated by DSS — even though clients submitted the correct paperwork on time — because the agency lacks staff to record this paperwork in its data processing system.

And despite assurances from Social Services Commissioner Roderick L. Bremby that more than 120 new staffers were added in March — and permission to add another 100 was just granted — Gonzalez and others fear the proposed asset test represents another wave of paperwork that will swamp the department.

The result, critics say, could be more clients improperly removed from the LIA rolls for months before errors are discovered and corrected.

Seeking solutions

So what’s the solution if urban Democrats want to cancel the cut and punch a $50 million hole in the new state budget? Just last month, Malloy and lawmakers had to raid nearly half of a $222 million account to pre-pay debt from the 2009 budget to avoid closing the last state budget in the red.

Gomes and Gonzalez both say Connecticut’s income tax needs to be more progressive, placing a higher burden on its top earners.

Occhiogrosso noted that, under Malloy, Connecticut established its most progressive income tax to date, expanding from three rates to six, and elevating the top rate from 6.5 percent to 6.7 percent.

Malloy has a strong sense that Connecticut’s tax policy should reflect the need to compete with neighboring states for the enormous wealth of Fairfield County’s businesses and residents. For the huge pocket of wealth centered on Wall Street, Connecticut’s competitors are New Jersey, westernmost Massachusetts, New York City and its closest suburbs.

The top rate in New York is 8.8 percent, though residents of New York City can add up to 3.6 additional percentage points to their top rate.

New Jersey’s income tax tops out at just under 9 percent.

Massachusetts has a flat rate of 5.3 percent on most income. But it taxes capital gains and other major investment income at 12 percent, forcing its high-end earners to pay more than they would in Connecticut.

“We have to maintain our competitive structure vis-a-vis our neighbors,” Occhiogrosso said.

Malloy also is finding himself in an increasingly tight fiscal box because of his concession deal with unions.

That agreement bars Malloy from imposing layoffs on most bargaining units since they agreed to wage freezes both last year and this one. That deal also calls for most workers to get a 3 percent wage hike starting in 2013-14.

The governor also committed last spring to increase spending on labor, particularly to expand contributions to the long-neglected, cash-starved state employee pension fund.

Municipal aid, another big section of the state budget, is politically off-limits for the most part, with both parties opposed to deep cuts in this area.

And with Republican legislators constantly decrying the $1.5 billion in taxes already raised, many lawmakers from both parties have said they don’t think the governor or many Democratic legislators want to go near the T-word again any time soon.

Taxing the wealthy?

But urban Democrats counter that Connecticut social service cuts aren’t the only budget-balancing alternative available. The state could raise income taxes on its wealthiest citizens and still maintain rates below its neighbors.

“Give me the power and it would happen,” Gonzalez said. “They need to pay their fair share.”

Urban Democrats also noted that Malloy narrowly won the 2010 gubernatorial contest against Republican Tom Foley, due largely to carrying Hartford, Bridgeport and New Haven by huge margins.

Harp, a veteran senator, said she understands the political problems with revisiting the income tax. “I know the governor’s not going to want to do it just two years out from running for re-election,” she said, but quickly added there still are other alternatives to cutting social services.

The New Haven lawmaker said she would like the administration and legislature to explore the hundreds of millions of dollars worth of business tax credits Connecticut has on the books, and repeal those that aren’t fulfilling any economic development goals.

“We should hold those tax credits as accountable as we hold our programs for the poor,” she said. “I think if we cut the safety net much more it would be very uncomfortable.”

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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